SEC-Nasdaq, Morgan Stanley Restitution: Compliance

Jan. 15 (Bloomberg) -- The U.S. Securities and Exchange
Commission rejected Nasdaq Stock Market’s request to offer
clients trading algorithms that would enable them to execute buy
and sell orders according to predetermined guidelines.

Nasdaq failed to specify in its proposal how it would
ensure that orders generated under its plan would comply with
rules requiring risk checks on buy and sell requests before they
are sent to markets, the SEC said in a Jan. 11 notice. It also
didn’t respond to criticism by the Securities Industry and
Financial Markets Association that the offering would compete
unfairly with algorithms supplied by brokers, the SEC said.

In delaying action on the proposal in August, the SEC said
Nasdaq hadn’t made clear how pretrade risk and capital checks
would be conducted on parts of its algorithms known as child
orders, which are pieces of the larger buy or sell request that
is submitted for execution. The SEC approved a regulation known
as the market-access rule in 2010 mandating risk checks on any
order sent for execution.

In addition, Nasdaq didn’t respond to concerns raised by
Sifma, the broker-dealer trade group, that allowing Nasdaq to
offer algorithms would place “undue burden” on competitors
given rules that limit exchanges’ legal liabilities, the SEC
wrote in the rejection notice.

Sifma criticized Nasdaq’s proposal in October on the
grounds of “regulatory disparities,” according to a letter by
Theodore R. Lazo, associate general counsel at Sifma. The group
also said it sought to offer a commercial service that would
benefit from the exchange’s limitation on financial liability.

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Compliance Policy

China’s Banking Regulator Warns About Wealth Management Products

China’s banking regulator told the nation’s lenders to
“strictly” supervise the design, sale and investment of their
wealth management products as it seeks to curb rising risks from
banks’ off-balance sheet businesses.

Banks are banned from selling wealth management products
without authorization, and should stop selling private-equity
related products or misleading customers into buying such
products, the China Banking Regulatory Commission said in a
statement on its website yesterday. Lenders are also required to
separate accounting and management of products that offer fixed
and floating returns, the regulator said.

Chinese banks have been relying on wealth management
products, which offer higher returns than benchmark deposit
rates, to dissuade households from moving their savings
elsewhere over the past few years.

The outstanding balance of banks’ wealth management
products may have reached 13 trillion yuan ($2.09 trillion) by
the end of last year, compared with 8.5 trillion yuan the
previous year, according to Fitch.

The regulator also forbade lenders and their employees from
participating in underground lending, and banned their customers
from using bank borrowings for re-lending, according to the
statement.

Japan to Allow In-Kind Benefits From Life Insurers, Nikkei Says

Japan’s financial regulators will reduce restrictions on
insurers to allow nursing care and other services in place of
cash benefits, Nikkei reported.

New insurance products are to be offered next year,
according to Nikkei. Insurers’ subsidiaries and vendors will be
allowed to offer in-kind services, the newspaper said.

A similar proposal, intended for implementation in
2007-2008, was resisted by consumer groups, according to the
Nikkei report.

Compliance Action

JPMorgan’s London Whale Trading Losses Probe Begun by Regulator

An investigation of JPMorgan Chase & Co. was opened by the
U.K.’s finance regulator as to whether traders in London broke
any rules related to wrong-way bets on credit derivatives that
lost their unit $6.2 billion.

The Financial Services Authority said yesterday in an e-mailed statement that it’s probing the losses suffered by
JPMorgan in the chief investment office, or CIO, at the firm’s
London offices. Other agencies already investigating the matter
include the U.S. Justice Department and Securities and Exchange
Commission.

Bruno Iksil, the U.K. trader nicknamed the London Whale
because he was responsible for a trading book large enough to
move the market, made a wrong-way bet on credit derivatives that
led to the company’s biggest trading loss. At one point, as much
as $51 billion in shareholder value was erased by the trades.

New York-based JPMorgan was ordered by U.S. regulators to
strengthen risk and auditing controls. The firm also promised to
bolster systems to prevent money laundering. After reviewing the
unit that suffered the losses, the Federal Reserve faulted
JPMorgan’s management and modeling of risks, as well as its
auditing functions and the process for communicating problems to
the board of directors.

The OCC is preparing a cease-and-desist order requiring New
York-based JPMorgan to fix internal controls that contributed to
its wrong-way bet on credit derivatives, a person familiar with
the matter said last month.

The chief investment office within JPMorgan’s national bank
suffered from “inadequate risk management,” Comptroller of the
Currency Thomas Curry said during U.S. Senate testimony in June.

The move to a formal enforcement proceeding by the FSA
typically indicates the agency found sufficient evidence of
financial rule violations.

Joe Evangelisti, a spokesman at JPMorgan, Robert Garsson at
the OCC, Barbara Hagenbaugh at the Federal Reserve and
Christopher Hamilton at the FSA all declined to comment on the
regulatory actions.

The bank’s board of directors is also considering releasing
an internal report that faults Dimon’s oversight of the division
when the company announces fourth-quarter earnings on Jan. 16,
two people with direct knowledge of the matter have said.

DNB Separates Personal and Corporate Banking Amid Rule Changes

DNB ASA, Norway’s largest bank, will separate its personal-and corporate-banking businesses into two new units to boost
competitiveness amid regulatory changes.

The new Personal Banking Norway division will serve the
lender’s personal clients in Norway, while Corporate Banking
Norway will provide services to small and medium-size companies,
Oslo-based DNB said in a statement yesterday. Trond Bentestuen
will head Personal Banking Norway and Kjerstin Braathen will
lead Corporate Banking Norway. The firm will also start a
wealth-management unit, including private banking, and said it
will establish risk management as a separate support arm.

Nordic banks face stricter capital rules as governments
move to safeguard taxpayers against potential losses in the
financial industry. Banking clients’ behavior is also changing,
with more and more customers using the Internet for their
banking needs.

RBS May Face $800 Million Libor Fine as Soon as Next Week

Royal Bank of Scotland Group Plc may pay as much as 500
million pounds ($804 million) in fines next week to settle
allegations traders tried to rig interest rates, two people with
knowledge of the matter said.

Investment banking chief John Hourican and Peter Nielsen,
the head of markets, may also be asked to leave because they had
responsibility for the parts of the company where the alleged
wrongdoing occurred, even though they may not have had direct
knowledge of the behavior, said two people, who declined to be
identified because the talks are private.

The rate-rigging allegations are the biggest blow to Chief
Executive Officer Stephen Hester’s attempt to overhaul the
Edinburgh-based lender after it took 45.5 billion pounds from
taxpayers in the largest bank bailout in history in 2008.

The size of the fine and the date of the settlement aren’t
yet fixed and the final details are still to be agreed, the
people cautioned.

RBS will claw back payments made in previous years to
people involved in the rigging and cut the investment banking
bonus pool by between 100 million pounds and 150 million pounds,
one of the people said. RBS paid its investment bankers about
390 million pounds in bonuses for 2011, the bank said in
February.

Officials at RBS, the U.K. Financial Services Authority and
the U.S. Commodity Futures Trading Commission and the Justice
Department declined to comment. Nielsen didn’t respond to an e-mail and Hourican didn’t reply to a voice-mail message seeking
comment.

Deutsche Bank Libor Report Should Be Public, Lawmakers Say

Deutsche Bank AG and Germany’s finance regulator are under
pressure to publish findings of a probe into whether the lender
rigged interest rates, with lawmakers saying a secrecy rule
meant to protect banks is crippling efforts to explore what’s
wrong with financial markets.

Unless a bank allows publication, German law bans the
regulator, known as Bafin, from disclosing facts from reviews if
it would be contrary to the lender’s interest. Lawmakers claim
the practice, aimed at protecting business secrets, hinders
effective controls.

Regulators from Canada to Switzerland are investigating
whether more than a dozen banks including Deutsche Bank colluded
to rig the London interbank offered rate, the benchmark for more
than $300 trillion of securities. The U.S. Justice Department is
conducting a criminal probe in parallel with civil
investigations by the Commodity Futures Trading Commission and
the U.K. Financial Services Authority.

Deutsche Bank denies any wrongdoing by its executives.
Christian Streckert, a company spokesman, declined to comment on
whether the bank will allow the Libor probe results to be
disclosed.

Bafin, like its counterparts in other countries, is bound
by the law not to disclose business matters of lenders it
supervises, said Ben Fischer, the regulator’s spokesman.

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Courts

Morgan Stanley Seeks $10.2 Million From Convicted Ex-Trader

Insider traders like Joseph F. “Chip” Skowron III must be
held responsible for the harm they cause their employers, Morgan
Stanley lawyers told an appeals court in a bid to recover $10.2
million.

Skowron, 43, who is serving five years in prison, was a
hedge fund manager at Morgan Stanley’s FrontPoint Partners LLC
until he was charged in April 2011 with using inside information
to avoid $30 million in losses.

The U.S. Court of Appeals in Manhattan heard arguments
yesterday in Skowron’s appeal of a judge’s order that he pay
$10.2 million in restitution to the New York-based bank, which
closed FrontPoint after the scandal. Morgan Stanley and
prosecutors argued in support of the judge’s order, saying he
hid his activities from his employer and the government.

The bank has also brought a civil suit against Skowron.

Joshua Epstein, Skowron’s lawyer, told the appeals panel
yesterday that Morgan Stanley is entitled to file a lawsuit to
seek the money it paid his client. The firm isn’t entitled to
restitution in the criminal case, he said.

Skowron, a doctor who trained at Harvard and Yale, is
completing his first year at the U.S. prison camp in
Minersville, Pennsylvania.

The case is U.S. v. Skowron, 12-1284, U.S. Court of Appeals
for the Second Circuit (Manhattan). Morgan Stanley’s suit is
Morgan Stanley v. Skowron, 12-cv-8016, U.S. District Court,
Southern District of New York (Manhattan).

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Exxon Knew in 1984 MTBE Would Triple Contamination, State Says

ExxonMobil Corp. knew in 1984 that adding a chemical to
gasoline that makes it burn more thoroughly would triple
incidents of ground contamination, lawyers for New Hampshire
said at the opening of an $800 million trial.

ExxonMobil and Citgo Petroleum Corp. are the last holdouts
in the suit by New Hampshire alleging oil companies knew the
chemical would contaminate groundwater. The trial, which began
yesterday in state court in Concord, pits the state’s
environmental claims against company claims they were simply
complying with federal pollution standards. It’s one of scores
of cases involving the additive methyl tertiary butyl ether, or
MTBE, that have been filed since 2000 against oil refiners, fuel
distributors and chemical makers.

New Hampshire contends ExxonMobil and Citgo knew MTBE would
pollute water supplies. The companies said the federal Clean Air
Act overrides the state claims and they were complying with
federal mandates.

Jessica Grant, a lawyer for the state, said in her opening
statement yesterday that Exxon decided “to disregard the
recommendation of its own employees and put MTBE in gasoline,”
even while it anticipated that the number of contamination
incidents would triple. Grant said each cleanup at that time
would have cost as much as $7 million.

In 2003, New Hampshire sued ExxonMobil and Citgo, along
with other oil companies, which have since settled. New
Hampshire is seeking $816 million to cover cleanup and
monitoring costs, Grant said at a pretrial hearing.

The state is “second-guessing decisions made by Congress,
the EPA and by the state’s own officials to rely on gasoline
with MTBE as the solution to air pollution,” Claire Hassett, a
spokeswoman for ExxonMobil, said in an e-mail. “Gasoline with
MTBE was a product that worked as it was intended -- it provided
significant health benefits by helping gasoline burn cleaner,
thereby reducing smog.”

Citgo said in an e-mailed statement that its “strong
safety and environmental record speaks for itself.”

Exxon and Citgo have not yet addressed the jury.

The case is State of New Hampshire v. Hess Corp., 03-C-0550, State of New Hampshire Superior Court (Merrimack
County). The federal cases are consolidated as In re MTBE
Products Liability Litigation, 00-11898, U.S. District Court,
Southern District of New York (Manhattan).

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Comings and Goings

Promontory’s Friend Rejoins OCC as Bank Regulator’s Top Counsel

Amy Friend, a former Senate Banking Committee lawyer who
helped craft the Dodd-Frank Act, is rejoining the Office of the
Comptroller of the Currency as the agency’s top counsel, the
agency said yesterday.

Friend, who joined Promontory Financial Group LLC in
January 2011, will fill a vacancy at the OCC left by longtime
chief counsel Julie Williams, who was hired by Washington-based
Promontory after leaving the national-bank regulator last year.

Friend, who starts work at the OCC next month, was
assistant chief counsel at the agency before she was hired by
then-Senator Chris Dodd in 2008 to be the Senate Banking
Committee’s top lawyer.